Making the decision whether to raise funds through crowdfunding or angel investment can be hard. Both of these options have pros and cons for startups who are looking to expand their business. If you own a startup company or small business and are looking to launch a new product, raise awareness through a marketing campaign, etc., it’s important to look into your options and choose the best fit for your situation.
In this post I’ve outlined a few important items to consider before making up your mind between crowdfunding and angel investing. If you are looking ahead at the future of your company, this post will help you decide which method of financing will enable you to achieve your goals.
Crowdfunding Pros
There are several good reasons why a startup would choose to raise funds by crowdfunding instead of (or before) angel investing. For one, this method can give your company access to funding without giving away equity in return.
Instead, companies who crowdfund may offer rewards in exchange for support. Since backers often receive products earlier than anyone else, crowdfunding can be a good way to attract new customers and prove your concept before going to market.
In addition, because the fundraising round is public, it’s easier to attract media attention and boost your popularity if you are successful. The simple fact that your campaign can be shared and commented in will increase the likelihood that more people know who you are and what your brand stands for.
Finally, if you are successful, you will come to the point where you must ship out your product to your backers. At this time, you’ll get an immense amount of feedback on the quality of your product and things that can be improved going forward. This information can guide the next iteration of your product!
For a more in-depth analysis of the benefits and drawbacks of crowdfunding, check out this article.
Crowdfunding Cons
As with anything, crowdfunding also comes with a few cons. Most crowdfunding platforms charge a fee if the project is successful, along with credit card processing fees (approximately 7 to 10%). This can mean that the more successful your project is, the more you will end up paying in fees. For example, if your goal is $10,000 and credit card and platform fees add up to 10%, you will pay $1,000. If you raise $100K that number goes up to $10K.
Another possible downside to crowdfunding as opposed to angel investing is the loss of valuable guidance and mentorship that angel investors bring to the table. However, crowdfunding platforms like Indiegogo and Kickstarter provide a lot of advice and support to project creators and help entrepreneurs in many ways. This is partly because the higher the platform’s rate of success is, the better it looks to backers and those looking to launch projects.
Crowdfunding sites are also starting to find ways to support entrepreneurs even after their campaigns end. Indiegogo’s new InDemand e-commerce feature allows creators to continue to sell their products on that platform, while the MoMA store sells Kickstarter-funded design products.
Finally, crowdfunding, particularly rewards-based crowdfunding, is limited in scope in terms of the average financing round. Although we hear about million dollar Kickstarter projects in the news, the typical amount raised is around $10,000. For design and technology projects, this number may be higher.
Angel Investment Pros
If you decide that crowdfunding is not for you, another viable option is angel investing. Like crowdfunding, angel investing has positive and negative aspects that startups should take into consideration before pursuing this kind of funding. One well-known site that connects startups with angel investors is AngelList, but angel investors can also be found through friends and family, networking, or from a board of advisors. According to a Forbes article:
“There are currently between 5-7.2 million people in the United States who are accepted as accredited investors. This group of people, which represents as little as 1% of the U.S. population, is made up of wealthy individuals that make $200,000 or more in base salary every year, or maintain a net worth of over $1,000,000 … According to the recent Reynolds survey, there are currently 756,000 angel investors in the U.S. who have made an angel investment or participated in a friends and family round of financing.”
Businesses who already have some revenue can benefit from angel investors when in need of funding to push their operations to the next level – such as to raise money for a new product launch or for a marketing campaign to expand outreach. Angel investors can be invaluable because they are personally invested in your success; many angel networks offer mentoring and other help to entrepreneurs.
In that sense it can be good to take a strategic approach when choosing an angel investor to pitch to. Looking for someone with the kind of expertise your company lacks can be a big advantage.
Another major benefit of angel investment over rewards-based crowdfunding is that you don’t need to use the funds to ship out your product to a bunch of backers. You can also spend some money on advertising or PR outreach. Unfortunately, most creators will only see a 5-10% profit margin on their campaigns, which can be used as reserve capital.
Angel Investment Cons
On the downside, angel investing means giving up equity in your company. This can be difficult for businesses because it means giving up some control. An Entrepreneur article notes that:
“Angel investors, like venture capitalists, also like to see an end game down the road that will allow them to pocket their winnings, whether it is a public offering or your business getting acquired by another company. You might have to give up running your enterprise before you’re done having fun with it.”
Angel investing may not be the right route for your startup if you plan on keeping control for a long time or if you want full freedom over the direction you want your company to go in.
Conclusion – My Question For You
Deciding on whether to look for funding through crowdfunding or angel investing can be tough. Each of these options has good and bad consequences that many vary from startup to startup.
Crowdfunding may work best for startups in their earlier stages, such as a company who is looking to finish prototyping and start mass production on their first product. Especially when it comes to simple projects and smaller funding goals, the crowdfunding community can be a great place to start promoting your company.
Angel investors may be a good choice for companies that already have a stable customer base and are looking to grow their business. Angel investors can provide large investments in startups ($25k – $1 million) and bring invaluable wisdom to a new company. The key thing is to decide how much equity you are willing to give up, and whether you can be flexible enough to keep your investors happy.
What other pros and cons can you spot? Let us know in a comment below!
